The first decade of Eurozone economic policy is marked by complacency, passivity and ultimately failure, as seen by Eloi Laurent.

Laurent, Eloi

English

Research Papers in Economics

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Economists’ Voice  www.bepress.com/ev  January, 2009 © The Berkeley Electronic Press
Eurozone: The High Cost of Complacency
Éloi laurEnT
A
s  the  Eurozone  is  celebrating 
its first decade of existence this 
January 2009, a paradox strikes 
the observer. Caught by the “Ice-
landic  fever,”  Eastern  and  even 
Northern small open EU economies are rush-
ing to adopt the Euro. Yet, the region finds it-
self in deep recession for the first time since 
its creation. So the Euro is attractive, but the 
Eurozone is inert. How to make sense of this 
seeming contradiction? It is tempting to blame 
America for Europe’s recession, but the slow-
ness of European action is also at fault. Actu-
ally, if we view the last decade as a whole, we 
see that European passivity has cost it dearly 
and there lies the key to the Eurozone’s still 
unfulfilled promise. 
By any reasonable economic standard, the 
ten years between 1999 and 2008 have been 
a golden era. There probably was not a bet-
ter  time  in  contemporary  history  to  launch 
a monetary union and, learning by doing, to 
build efficient and resilient economic policy 
institutions to ensure its prosperity and sus-
tainability. Yet, the decade was largely lost by 
Europeans in vain doctrinal debates and ster-
ile  blame  game  sessions.  Jean-Paul  Fitoussi 
has convincingly argued that economic doc-
trine  (e.g.  determining  the  number  of  “pil-
lars” a central bank monetary strategy should 
comprise) plays a central role in the Eurozone, 
as  it  does  more  generally  in  the  European 
Union. The reason it absorbs so much time 
and energy is that, absent a true democracy, 
economic doctrine has become over the years 
the justification of political power in Europe. 
Blame games also serve a purpose, which is 
essentially  to  cover  up  collective  indecision 
and divergence among national governments 
as to what their collective growth strategy in 
globalization should be.
But arguing instead of acting has its cost. 
With virtually the whole planet booming over 
the past decade, the Eurozone has, since its 
creation in 1999, displayed the worse perfor-
mance in terms of growth and unemployment 
of the developed world, barely ahead of a de-
pressed  Japan.  Not  to  mention  the  growing 
divergence among its members with regards to 
inflation and long-term interest rates.
Éloi Laurent is a senior research fellow at OFCE (Sciences-
po  Centre  for  Economic  Research,  Paris)  and  teaches  at 
Sciences-po, Stanford University and the Collège des hautes 
études européennes (La Sorbonne).--
Economists’ Voice  www.bepress.com/ev  January, 2009
a persisting deficit of growth and 
confidence
I
n a report released last year, which received 
too little attention, the European Commis-
sion compiled striking data comparing EU 15 
countries that became part of the Eurozone 
with those that decided against it a decade ago. 
Since 1999, the non-members have exhibited 
comparable or better nominal indicators (in-
flation, interest rates, fiscal balance) and far 
better real ones (GDP per capita growth, un-
employment, labour productivity). 
GDP per capita growth has actually de-
creased in Eurozone countries between 1989–
1998 and 1999–2008, while it has acceler-
ated over the same period of time in Sweden, 
Denmark and the U.K. In the meantime, the 
confidence of Eurozone citizens in their com-
mon currency has plummeted. According to 
the Eurobarometer, while 59% in the Euro-
zone thought the Euro was advantageous in 
September 2002, only 48% had this opinion 
in September 2006 (with negative opinions 
climbing from 29% to 38%). 
One  might  conclude  from  these  unflat-
tering numbers that the value added of the 
Euro is so far, at best, dubious and wonder 
why. But the European Commission did not, 
and recommended instead more of the same 
economic  policies,  stressing  the  importance 
of  “budgetary  surveillance”  for  the  future 
and dismissing calls for improving economic 
cooperation and coordination among member 
states. Driving the same road, chances are Eu-
rozone countries will enjoy more of the same 
economic performance. 
In  fact,  the  latest  by-product  of  the 
European irresolution stands before our eyes. 
The  European  Central  Bank  (ECB)  made 
in 2008 the exact same mistake as in 2001 
by resisting a necessary cut in interest rates 
(actually,  it  increased  interest  rates  in  July 
2008),  waiting  for  the  worst  to  be  certain 
instead of trying to prevent it. In the mean-
time, the Fed acted boldly on both occasions 
to keep the U.S. economy growing. After the 
2001 recession, it took a year for the U.S. to 
go from negative to vigorous growth. In the 
Eurozone, it took five years to fully recover. As 
for fiscal policy, despite the European label-
ling by the Commission of diverging national 
plans in December, a true European stimulus 
is still nowhere in sight, even as the economic 
outcome worsens by the day.
a large economy or a collection of small 
competing countries?
I
n the face of so much evidence, the Europe-
an passivity is hardly understandable. Who 
can seriously argue that monetary accountabil-
ity exists in the Eurozone, when ECB statutes 
are de jure untouchable? As for the Eurogroup, 
the  informal  gathering  of  Economic  and  Fi-
nance ministers of the Eurozone, its most im-
portant contribution to policy-making seems 
to be the choice of the adjective with which it 
characterizes its “concern” about the various 
aspects of the economic context. Actually do-
ing something about it is apparently not in its 
repertoire.
Facts speak for themselves in this regard: 
the  financial  and  banking  crisis  started  to 
receive  an  adequate  response  after  an  im-
provised meeting of head of states and gov-
ernments  of  the  Eurozone  last  October,  a 
standing  body  that  does  not  even  exist  in 
European  treaties.  As  Fitoussi  observed: 
“the  structure  of  power  is  such  in  Europe 
that those institutions who have the instru-
ments to react have not the legitimacy to do 
so  while  those  which  have  the  legitimacy 
no longer have the instruments. Hence the --
Economists’ Voice  www.bepress.com/ev  January, 2009
passivity of European policy reaction.” This 
inconsistency must be remedied and the cur-
rent crisis must not be wasted.
The Eurozone is a single large economy, 
and, as such, needs proactive and cooperative 
macroeconomic policy of both the fiscal and 
monetary variety if it is to avoid disintegration 
in the medium term and to actually prosper 
in the long run. Stability without prosperity is 
not a viable option. Member states already ra-
tionally behave like small economies, pursuing 
competitiveness at the expense of one another, 
and  monetary  union  runs  the  risk  of  being 
turned  into  a  zero,  or  even  a  negative-sum 
game. The recent evolution of tax competition 
on corporate taxation is a salient illustration of 
how not only small countries compete against 
large ones in the Eurozone, but also large ones 
among themselves, with Germany as the front-
runner. If the Eurozone continues to be run 
like  a  collection  of  competing  small  econo-
mies, the result will not only be slow regional 
growth and persistent unemployment, but also 
growing divergence among member states and 
rising political tensions.
Eurozone officials cannot go on pretending 
for another decade that they have consistently 
built the right economic institutions but end up 
systematically with the wrong economic poli-
cies, which amounts to saying that the region is 
endowed with perfect rules but flawed rulers. 
This can not be true. As James Buchanan and 
Geoffrey Brennan put it, “good games depend 
on good rules more than they depend on good 
players.” The question is thus: isn’t it time to 
change the rules of the game in the Eurozone? 
where to start?
B
ut how to avoid the colossal cost of rene-
gotiating European treaties? A good place 
to start would be to apply European law on ex-
change rate policy. The interpretation whereby 
the EBC reigns supreme on the Euro exchange 
rate is indeed highly debatable. The ECB is de 
facto in control of the exchange rate policy of 
the Eurozone through the exclusive control it 
has over the interest rate. But, legally, the Coun-
cil can formulate general orientations for the 
exchange rate policy (Article 111 of the Euro-
pean Union Treaty) and the ECB must support 
those orientations when they are formulated, 
in accordance with its mandate. 
As the ECB itself put it, the “ultimate re-
sponsibility” for the exchange rate policy thus 
lies with the member states. Another way to un-
derstand this balance of power is to stress the 
distinction  between  independence  of  means 
and independence of objectives. The ECB is 
legally independent in terms of the means cho-
sen to achieve the general exchange rate objec-
tive set by the Council. But this objective has 
to be discussed between the Council and the 
ECB. Hence, because the exchange rate policy 
is unambiguously a legally shared competence 
between the Council and the ECB, it could be-
come the embryo of a true European economic 
policy, put under the authority of the newly 
created gathering of Eurozone’s heads of states 
and governments. By growing it into a full eco-
nomic sovereignty, the Eurozone could be able 
to  escape  premature  death  by  disintegration 
and reach maturity.
Letters commenting on this piece or others may 
be  submitted  at  http://www.bepress.com/cgi/
submit.cgi?context=ev.
references and further reading
Fitoussi,  Jean-Paul  (2006)  “Macroeconomics 
and institutions,” Angelo Costa Lecture. Rivista --
Economists’ Voice  www.bepress.com/ev  January, 2009
di Politica Economica, January 19. Available at:   
http://www.rivistapoliticaeconomica.it/2005/
nov-dic/Fitoussi_eng.pdf.
Flash Eurobarometer (2006) “The eurozone, 5 
years after the introduction of euro coins and 
banknotes,” European Commission. November. 
Available at: http://ec.europa.eu/public_opinion/
flash/fl193_en.pdf.
EMU@0 (2008) “Successes and challenges af-
ter 10 years of Economic and Monetary Union,“ 
European Commission Directorate-General for 
Economic  and  Financial  Affairs.  Available  at:   
http://ec.europa.eu/economy_finance/emu10/
emu10report_en.pdf.

Eurozone: the high cost of complacency.

http://spire.sciences-po.fr/hdl:/2441/eu4vqp9ompqllr09hac11h0j4/resources/eloi-ecovoice.pdf

Eurozone: the high cost of complacency.

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